Financial Management for Authorpreneurs (Part 2): How to Measure Net Income

Karen Myers shares her expertise in financial management for the benefit of indie authorpreneurs

To help indie authors evaluate the effectiveness of their writing as a business, in the second of a short series of posts US authorpreneur Karen Myers, formerly a Chief Operating Officer and Chief Financial Officer for several small-medium businesses, tells us how to evaluate our writing activities commercially and how to improve their profitability, addressing gross income, net income and return on investment.

In this post, she defines the concept of net income, shows how to calculate it, and demonstrates strategic use of that information.

(Karen uses accounting terminology from the USA business world, but all countries do similar things though the terms may vary.)

Net income or Do you actually make money?

Your business has costs, of course, such as marketing, office supplies, rent, utilities, and so forth. These costs are indirect — they’re not associated with a particular line of business, or they’re not required to produce the product being sold, which would make them part of COGS (Cost of Goods Sold).

Typically these indirect costs are relatively stable. They don’t grow very quickly as the lines of business grow, and they’re quite predictable. In American terminology, this is often referred to as the “nut”, the cost you have to cover with your Gross Profits (see previous post for a reminder of what this means) in order to be profitable overall.

Net Income = Gross Income minus all indirect costs.

Net Income is what you pay taxes on.

In a larger business, the indirect costs would include salaries for anyone not actually making or managing the products that are sold, and the related healthcare, pensions, and other costs.

Obviously your Gross Income has to be profitable before your Net Income can be, and you must pay particular attention to trying to minimize your indirect costs.

Marketing

Marketing is usually applied to a particular business line, and often to one element in the line, such as an ad for a particular book. Why is that considered an indirect cost instead of a direct cost?

Part of the reason is that it can be difficult to associate a particular marketing cost with a particular sales income, but the main reason is that marketing is an optional cost. You can produce the titles, or consulting work, or whatever line of business without marketing. You may make more money if you also market it, but you don’t have to incur that cost necessarily.

Coming soon: the third post will complete the financial picture by addressing Return on Investment.

3 Responses to Financial Management for Authorpreneurs (Part 2): How to Measure Net Income

No, it’s the same. Gross Income is Income minus Direct Costs. Net Income is Gross Income minus Indirect Costs. That’s the same thing as saying: Net Income is Income minus Direct and Indirect Costs.

It’s just that the former version is much more useful for analyzing the performance of your business.

Distribution of overheads can indeed get complicated, but mostly at the labor level (dividing one person’s time into different kinds of tasks). For our little businesses, it isn’t really worth bothering with. (For trad. publishers, it’s a different story.)

There are two philosophies about financial management structures: build reports to make the tax and regulatory bureaus leave you alone, or build reports that help you understand your business better. I am heavily prejudiced toward the latter.

I’m not sure this is right for U.K. Authors. Net income, what you pay tax on, is income minus all costs, direct and indirect. Your business cards can’t be attributed to single book but are still a business cost. The cover is for a single book and is still a cost to be deducted before net income.
Bigger businesses may have multiple activities all needing separate accounting and the distribution of overheads can get complicated.
Profit can also be measured at different points; gross, net, before and after tax etc
U.S system may be very different…